Kathmandu:

There is a move by the ministry of finance (MoF) under Dr Roop Jyoti to lower customs tariffs by 32 per cent. Some trade association have praised the move, others have criticised it. Understandably, the Department Stores Association of Nepal has welcomed it, equally understandably the FNCCI has criticised it.

Department stores want to sell foreign goods, they know that customers prefer imports. They reckon bringing down tariffs will bring in buyers boosting their revenues and profits. What may be good for stores may not be that good for manufacturers who have to compete with foreign producers, and, hence, their association is unhappy.

What is the MoF to do? Whom should it listen to? Fortunately, MoF doesn’t have to do too much hard work to get the answer. No country with high tariffs has ever progressed.

A country with a high income tax can be well off (though without income tax it would do incredibly better), if it has zero or close to zero tariffs. Scandinavian countries are prosperous despite taxes on income exceeding 50 per cent, since they all maintain minimal duties. Low tariffs enable people to become wealthy, even though, later, income taxes may take away a substantial chunk of their money. High tariffs prevent people from becoming rich in the first place.

India remained mired in poverty, its manufacturers sheltered in a cocoon of import prohibitions and 100 per cent to 400 per cent tariffs. Several industrialists cried ‘foul’ when tariffs started to come down in the 1990s’. They were led by the likes of Rahul Bajaj, India’s prime producer of two-wheelers.

He wanted protection for his clan – ‘the Bombay club’. Much in the same manner FNCCI is wanting a shield for its members. The irony is that today, Bajaj, is thriving as never before. His factories, under intense competitive pressure, were restructured and achieved phenomenal gains in efficiency. Now, they are not only producing for the home market but exporting as well.

What is true of scooters and motorcycles is true of cars as well. India which could produce only the eyesore – Ambassador – today produces dozens of models and in 2005 exported more units than China. This could only have happened in a liberalised environment where manufacturers could source their components from the most competitive supplier in the world.

FNCCI is unnecessarily afraid. Its members too should face competition. They will become better because of it. They will also figure out the areas of production where they do not have the advantage, get out of them, transferring resources to where they do have a comparative advantage.

All this is a plus for the country. Resources, be it manpower or raw material, automatically move to their most valued use in a free market. This increases efficiency and leads to wealth.

Some industries will close, but businessmen will quickly find other things to do.

As one door closes they will find another two opening. In India many industries were crippled by lowering of tariffs, but many more came into existence who could now be competitive because their inputs could be obtained at much cheaper rates from abroad.

The result was an explosion of manufacturing and retail activity India had never witnessed before. The Indian economy took off. It went from no growth to a rate of six to eight per cent in the last 15 years – a rate exceeded only by China amongst the world’s major economies.

Even now in India, the import tariffs are too high. Huge productivity gains are possible in India (and in Nepal) by eliminating import restrictions and duties altogether. In the meanwhile, we should cheer each and every reduction in duties, though never loosing sight of our ultimate goal – a duty free country.

By reduction in customs duties, which businessmen loose and which gain is irrelevant. What is relevant is that that the people of Nepal – you and I as consumers – stand to gain. And gain big.

Goods of quality will cost less and employment opportunities will skyrocket as Indians, Chinese, Bangladeshis and people of other countries flock to Nepal to pick up duty free goods.

(The writer can be contacted at: everest@mos.com.np)